SLP93 Raoul Pal – Global Macro Risks and Bitcoin

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Raoul Pal (CEO Real Vision and Global Macro Investor) joins me in this episode to discuss the Global Macro Risks that he sees, and his perspective on Bitcoin. We talk about the stage of the business cycle that we are in, problems faced by individuals and corporates, and Raoul’s views on Bitcoin. 

Raoul Pal and Realvision links:

Sponsor links:

Stephan Livera links:

Podcast Transcript (Sponsored by GiveBitcoin.io)

Stephan Livera: Hi, and welcome to the Stephan Livera Podcast, focused on Bitcoin and Austrian economics. Today, for episode 93, I’ve got a really special guest. He is Raoul Pal, CEO of Real Vision and of Global Macro Investor.

Stephan Livera: But first, a word from my sponsors.

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Stephan Livera: This interview with Raoul is a great one. We talk about global macro risk factors that Raoul is speaking about these days, such as the troubled European banks, corporate debt, demographics trends with baby boomers, central banks and what their potential response will be, and obviously we also talk about Bitcoin and the way that Raoul is thinking about it and how many other investors are thinking about it. So I’m sure you guys will really enjoy this interview.

Stephan Livera: Raoul, it’s a pleasure to welcome you to the show.

Raoul Pal: Great to be on the show.

Stephan Livera: Thank you.

Stephan Livera: So Raoul, I know you’re a macro thinker, you’re CEO of Real Vision, and you’ve been commenting about some of the problems that the global economy’s facing, and also you’ve been commenting about Bitcoin, but before we get started maybe just tell my listeners a little bit about yourself, what you’re doing with Real Vision and potentially also with Global Macro Investor.

Raoul Pal: My background is finance, and hedge funds in particular, and macro in particular. I was at Goldman Sachs, where I ran the hedge fund sales business and equities and equity derivatives. In fact, I started that business in Europe. So there I was talking to the world’s most famous hedge fund managers, from Stan Druckenmiller to Paul Tudor Jones to Louis Bacon, so I got to learn a lot from the masters of this dark art.

Raoul Pal: And then I decided to leave and join what was the largest hedge fund firm in Europe at the time, GLG Partners, where I started and managed the global macro hedge fund there. So I did that for a few years. Global macro, for people who don’t know, is basically a multi-asset class approach to looking at how the global economy works and looking for the opportunities to invest according to macroeconomic movements, whether that’s in GDP growth, inflation, or whatever it may be. That tends to be across everything from commodities, to currencies, to stock markets, to bond markets, to credit markets, and literally everything. So it’s a very complicated world, but a really fascinating, exciting, unique world. So that’s what I did for a long time.

Raoul Pal: Then I decided to opt-out of the rat race and I moved to Spain, where I started writing the Global Macro Investor. Global Macro Investor is my kind of institutional research service, which is read by many of the world’s largest hedge funds, family offices, sovereign wealth funds, so it’s a very well-known publication in that space. Very expensive publication. But it’s very well-known in that space, and I still write it now, so that’s been going for 14 or so years.

Raoul Pal: And then a few years ago, about five years ago, I had the crazy idea with a few others to start the Netflix of finance, which is basically what Real Vision is. Because we thought that in 2008, so many people didn’t know what was going on, yet a whole bunch of us did. And I would say, in today’s parlance, the elites knew and the others, the 99%, didn’t have a clue. And I was very uncomfortable with why that was. And it’s because financial information was really kept amongst the people who could really pay the most for it. You know, I’d been in that business. And I realized that we could probably democratize it and video was the way, and creating an on-demand video service, a subscription-based service, where we would interview the most famous people in the world in the investing space, to pick their brains long-form. Like podcasts are now showing the light in terms of how long-form is very engaging for people. Well, we thought the same thing. So long interviews, reportage, on-the-ground stuff, deep dives into all sorts of stuff. And people loved it. So that’s the other thing that I do, is Real Vision.

Stephan Livera: Fantastic. And I think now that we’ve got a little bit of your background, I know you have recently been commenting about some of the global macroeconomic risks that you see. Some of that is ranging on the risks in the troubled European banks, the demographics in terms of who is going to be going through redemptions, also the tight spot that central banks are placing themselves into. Did you want to just open with some of your thoughts around that?

Raoul Pal: Look, it is a massive topic. So if anybody’s interested, I’m not here to necessarily just to do a plug, but go to realvision.com/free, there’s our free channel, you don’t even have to pay for that one. And my whole video for an hour and ten minutes is on it which goes through, at length, how I think there is a potential for a recession teeing up.

Raoul Pal: Global growth has been slow, we have some other big, influential factors. We’ve seen, and you’ll have felt in Australia, China being… its economy is slow. Across south east Asia, all the economies are slow. Australia’s is pretty slow itself, could it go into recession or not? That’s one of the questions everybody’s asking. But on a global basis, Europe is also slow, and the US is relatively slow and slowing. So we’re at risk of going into a recession.

Raoul Pal: Now, normally there’s one other factor that gets triggered that causes that recession. The bond market’s been screaming it for a long time, as yields have been falling. I mean, Australian yields are record lows, European yields are record lows, US yields aren’t there yet but many places around the world, record low bond yields and interest rates. And really what they’re screaming is that the trade tariffs, and that de-globalization that is being brought out of Trump, and is now gaining traction, is a really big deal. And it’s a big deal because it changes the structure of world trade, it puts tariffs on things, and it forces multinational corporations to try and change their supply chains.

Raoul Pal: So, if you are Apple, and you buy your phone parts in China and the US is making it damn difficult for you to buy those phone parts from China, you’re going to have to figure out where to buy them from. Problem is, nobody else makes them. So you’re going to have to go help somebody set up a factory in a different country, so you choose Vietnam. Well, Trump just stopped the Vietnam one too, by saying, “Well, I’m going to put tariffs on that.” So then you’re like, “Oh shit, should it be Mexico? Have they got the resources? How are we going to do that in Mexico?” Meanwhile, Trump is still having a war with Mexico and he’s also started making noises about India, and he’s making noises about Europe. So as a corporation, what you’re going to do is generally stop doing anything, and bring in some consultants and spend some time thinking about how you restructure your whole business. So that could be a very large global growth shock in the making, and I think it is.

Raoul Pal: And so while that’s going on, global growth and global inflation has been plummeting. Bond yields in Europe have gone super negative and, guess what, the banks are freaking out. Because banks really make money by lending money, and if interest rates are negative, well that’s the end of your banking system. Now, they’ve already got a ton of debts themselves. So they’ll have debts upon debts that have never been resolved, and their share prices are plummeting. So today, the Spanish banks started hitting all-time lows, Banco de Sabadell, I think BBVA, as I call it, falling off the cliff of death. And this is a big bank, BBVA. Bankinter, which was partly supported by the state, is looking… And Bankia is looking troublesome as well. So we’ve got the Spanish banks, the Italian banks, and the German banks, probably the Swiss banks, and then just behind them the French banks, all looking terrible. And how is Europe going to resolve that?

Raoul Pal: Meanwhile, the European economy’s slow so what is the answer? Cut rates. Well, if you cut rates any further, you’ll make it even worse for the banks. You’re creating a death spiral. So in which case, interestingly enough, the ECB tried to appoint, or will appoint, Christine Lagarde, who’s the head of the IMF, whose job has been to negotiate bailouts, she’s a lawyer and a politician. So if you’re thinking about where does Europe go from here, it probably has to go to a bank bailout that has to be dealt with Europe-wide, it has to be some sort of monetary… have fiscal stimulus that has to be negotiated at a political level across Europe. The Germans don’t want to spend money, but they have to. You need to break all the Maastricht Treaties about how much money you can spend, so that needs to be negotiated. I mean, there’s a big job to be done, and if that can done in enough time for the banking system to remain solvent.

Raoul Pal: So, there’s some huge problems going on around the world. China itself has enormous debts, it has a broken financial system, it doesn’t really want to stimulate, and stimulate Australia and the US economy all over again, because it would rather spend the money on trying to defend its own banking system and it’s struggling with not letting its currency collapse. So we’ve got a whole load of stuff going on right now in the global economy.

Stephan Livera: Right. And I think you take this view as well of it being cyclical in nature, and I think many people do do that, of having these broad, mega, larger cycles, and then smaller cycles within that. And as individuals or institutions, we have to try to adapt to what’s going on around us, and one of the challenges then is you might try to act in a certain way but then, let’s say, there’s always that variable of what will the central bank do? What will the regulator do? What will the politicians do? So, how do you think about that sort of thing, if you were to take a certain action, to invest in a certain way, but then let’s say the central bank might try to juice things up again with lower rates?

Raoul Pal: I think the business cycle trumps all. If I go back, the business cycle has been going on hundreds of years. Now, it may change in its frequency, so now we get less cycles because of central bank management, so it tends to be smoother, less volatility. If you go back to pre-1960s, it was lots of violent business cycles. So yes, it’s dampened volatility, but they can’t not erode it. The business cycle doesn’t go away, and in fact, what the volatility suppression of the business cycle has created is a risk of hypervolatility in due course, because you allow imbalances to build up. So the point of a business cycle is that it clears out the imbalances, too much borrowing…

Raoul Pal: And Australia was a classic example of an economy that went too long without a recession, so what you ended up was a gigantic housing bubble and you also had a gigantic mining bubble, both of which have to unwind. And they take time, and they’re painful, and if you’re not careful you can lose your banking system in the middle of that. So I think you should base your investments based on where we are in the cycle, understanding that. It may take longer, but over time the cycle still works. You can show a graph of GDP to a child and they’ll say, “Well, it goes up and down.” Show it to an economist and they’ll write you a linear formula, which is the bizarrest thing. Economists just say, “Well, you know…” They never forecast recessions. I’m like, “Are you kidding me?” Obviously it comes up and down every five to ten years, so why would you not forecast that? But they don’t see it in those terms.

Stephan Livera: Yeah, it’s an interesting comment there, Raoul. Because I think perhaps that’s a slight difference in the world views, depending which economic school of thought. On this podcast, I come from a more Austrian school of thought and part of our view on that is that the business cycle is a creation of the central banks and is driven by that expansion of credit. But I suppose that’s getting to what is the root cause of the cycle.

Raoul Pal: Yes. And I think it pre-existed central banks, because when we just had gold standards, there’s other lending cycles… It is a credit cycle, but before that it was the commodities cycle, it was the crop cycle. So there’s elements of the business cycle even in Egyptian times, and that was the flooding cycle of the Nile, because that gave crops, so you had boom-bust. So there was years when the farmers had… You know, there was the seven years of famine, seven years of… Yeah, it’s all business cycle, driven by a number of factors. The factors change over time, but I think credit, as you rightly say, whether it’s the central banks or just private sector credit, it’s the predominant driver these days of the business cycle.

Stephan Livera: Fantastic, yeah. I think that is definitely aligned with the Austrian answer, that even absent the central bank, if there was an expansion of credit beyond the amount voluntarily saved, that was what drove this what we call malinvestments, into these, colloquially, bubbles that we’ve seen. But Raoul, I’m also really keen to talk about Bitcoin, because you mentioned it in your recent thread and actually you’ve interviewed a few people, I was doing some research on Real Vision, you’ve interviewed a few Bitcoin experts as well. Can you give us some of your thoughts around your own personal Bitcoin journey, how you came to learn about it, and how you’re thinking about it these days?

Raoul Pal: So, go back to the cycles. The cycle is there’s a debt supercycle. The debt supercycle is, in Austrian terms, Kondratieff Winter. So what we are is we are in the final stages of the debt supercycle. We’ve seen the rolling blow-ups, it started with the kind of tech and equity bust in 2000, it rolled into the housing, financial, the banking system, and I think it’s probably got the corporate debt market to do. So it’s been a rolling bust, as we roll through trying to unwind and unleather some of this, and that is typical of the latter stages of the big debt bust. I think the last major one we had was obviously the 1920s.

Raoul Pal: So this is a secular cycle. In secular cycles, what you’re looking for is what is the outcome that changes it, coming out of it? And when I first discovered Bitcoin… Because some of my clients had begun to mine it when it was at 17 cents. They were running a hedge fund, and they happened to have electricity included in their office space, and somebody talked to them. They were very, very early adopters. They’re now both quite famous in the crypto space and the blockchain space, but they started mining it in their offices and making money. And they held it all the way through to the big rally, so these guys made an extraordinary amount of money out of the thing. But they became my guiding guys for this, so I started seeing it and thinking about it, and then I realized very quickly how my first understanding was digital gold. I now think that is just one of the nuances of it, whether it’s Bitcoin and the whole space, it’s just a small part of what the whole space is actually becoming. It’s becoming a much, much larger thing than I think most people can get their heads around right now.

Raoul Pal: So, I wrote an article. I got long, around $200. I wrote an article in, I’m guessing, 2013. I think I was probably the first person to put together a valuation using the above-ground supply and below-ground supply of gold, and imputing that into Bitcoin, which was basically the Stock-Flow model at a very simplistic level. And I came up with a valuation that Bitcoin, if it was a gold equivalent, would be worth a million dollars with gold roughly at the same price as it is today. So that went round Silicon Valley very quickly, and around finance very quickly, because it became the first time anybody had really kind of put a macro framework around Bitcoin. And I was using technical analysis as well, and I was relatively early in that game.

Raoul Pal: I then started talking about it when we launched Real Vision in 2014. We talked about it then as being an alternative to the financial system, and blockchain and Bitcoin itself being some sort of future, or part of a future, of finance that didn’t involve… that had a trusted ownership of assets, you know this was a key thing that both the smart contract but also the blockchain and the ability to custody all assets. Having gone through Lehman and MF Global and a whole bunch of other stuff, and nobody knows what collateral is whose, who owns what, is a huge problem in this world. Look at Deutsche Bank right now, they’ve got 45 trillion dollars of derivatives on their books, 45 trillion with a “T”, and they potentially are going to go under. A lot of this is all netted off, but who the hell owns what? And whose collateral is whose? And how many times has it been re-hypothecated? Nobody knows.

Raoul Pal: So this is the kind of issue that I thought it was to solve first, because I’d been very involved in the plumbing of the financial system and understanding how close to failure it got back in actually 2012 when Europe almost defaulted, the various European states, and the world’s collateral was about to go under. So I realized that and so that got me on the journey of understanding, so I rode it and I sold out far too early, at about 2000 or so. And then I kept out of the space. I monitored it, because I didn’t understand the forks, and I thought the forks were dilutive. But I think the forks in the end ended up being like a scrip issue or a dividend, it wasn’t clear what it was in the end, but it wasn’t dilutive. What was incredible was how robust Bitcoin was in that process.

Raoul Pal: And what was also interesting in this journey is a lot of people I really respect out of my macro space had moved across and not just to Bitcoin, but to the entire space. Whether it was Dan Morehead of Pantera, whether it was Novo, Mike Novogratz at Galaxy, whether it’s John Burbank from Passport, and most frequently there’s an interview today on Real Vision with Dan Tapiero, another famous macro guy, he’s now completely in this space as well. And they were all over the space, because they were applying kind of macro thinking, big picture frameworks, and that kind of future philosophy that you have to apply to macro thinking, and probabilistic outcomes, to this and seeing okay, the probabilities are, even with a small probability, the risk-reward is so enormous that this is the best opportunity in the world, in the whole space.

Raoul Pal: So then I got back into the space again, as I started talking actually to Dan Tapiero, where I started to realize that the whole space was really bigger now, and the digitization of everything was the play. And Bitcoin was part of this, the other crypto currencies, the tokens, all small parts of a much, much bigger picture, which is kind of the value of anything digital, and everything having a digital value. So that’s I think where it was going, which is quite a big topics.

Stephan Livera: Yeah, that’s fascinating.

Stephan Livera: And so with Bitcoin then, I’m unsure of whether you’ve read… One of my friends, Saifedean Ammous, has written one of the books called the Bitcoin Standard. I’m unsure of whether you’re familiar with that way of conceiving of Bitcoin?

Raoul Pal: No.

Stephan Livera: No? Okay. So it’s essentially around this idea that Bitcoin is the hardest money, Bitcoin is the best money, and that, over history, we would expect there to be a convergence towards the most saleable or most marketable money. And historically, as Saifedean points out, it tended to be that with the highest stock-to-flow ratio. And so that was part of some of our, those of us who are Bitcoiners and bullish obviously, we think of it like that. And so as you said, it’s like making a probabilistic bet, and I think that’s potentially something that many people don’t really think about, because they think, “I don’t want to be wrong.” But instead, if you’re thinking like a poker player, it might be like, “Hey, I’m calling a small amount, to potentially win a big amount.” And so we view Bitcoin like that, like it’s an asymmetric bet.

Raoul Pal: Yeah, it’s an option. And, okay, it’s less of an option than it was when it was much cheaper, but if you look at PlanB’s stock flow model, stuff like that, you can see the comparative upside. And if you try and get your head around the digitization of everything, if you try and get your head around an alternative financial system, even if it has a low probability, right? If you recreate a low probability of, let’s say, what’s global money supply and global debt? It’s something like, I don’t know, call it 80 trillion dollars or something.

Raoul Pal: Okay, so if it’s worth 80 trillion dollars, let’s say you have a 10% probability, that’s 8 trillion dollars. It’s currently worth 200 billion dollars. So even if there’s a 1% chance of working… You know, that’s how probabilistic frameworks work, and what it’s telling you is it’s ludicrously underpriced if any of these probabilities play out.

Raoul Pal: So that’s how crazy attractive it is, and that’s why it’s sucking in so many of these macro guys, because they’re like, “Damn, nothing else has this payoff.” And they’re used to trading in options, right? Options is what they do, binary outcomes is what they look for, asymmetric bets is how you make a career. So they’re looking at the asymmetries embedded in the space, and they’re like, “Okay, this is super interesting.”

Stephan Livera: Right, and then what does it take for more of the macro fund investors to come and be drawn into Bitcoin? Is it just a time factor? Is it that we’re already seeing that now?

Raoul Pal: I don’t know anybody who isn’t in it. But they’re not in it as a fund, because that’s still difficult. So you need the ability to have it as an asset within your funds, so many people will use the digital currency, the Bitcoin trust. So some people use that. But the problem is it trades at a huge premium, so you feel a bit of a dick by doing that, you need to be careful. So people are waiting for the custody and ownership abilities. So, the futures contract, the new futures contract that’s fungible, that’s going to help. So when that comes, there’s a number of things in this space, but all of them personally are in it. I mean, I know all these macro guys, they’re all in it. They get it. They get the optionality. They may be complete believers, part believers, partial believers. But even then, if it’s a 1% chance of being right and the upside is 100x from here, you’d do this all day.

Stephan Livera: Yeah, that’s the fascinating part to us, and I think many of us Bitcoiners also would suggest, and another thought here is, that over time what’s happened is we have low quality money, because of fiat money, right? It continually is being inflated, it’s going down in value. And so we believe that there are other assets that are being used as a store of value, in some sense. So, you know, in Vancouver real estate or Sydney premium real estate, or New York or London and so on, and one argument that I’ve seen put forward by Bitcoiners and I agree with this view, is that some of that premium, if you will, will come out of some of these assets and into Bitcoin. And so in that sense, the actual total mark of Bitcoin may be much, much greater than even that 80 or 90 trillion.

Raoul Pal: Yeah. The gold people have the opposite view. Everybody has some skin in that game. My view is I don’t care, because I think there’s room for the all. And, you know, real estate will get tokenized anyway, and you can have a fractional ownership of a building you could never afford. So everything I think is going to change. I think even talking about the world in the constructs of which we understand… And I know this sounds slightly ludicrous, but I think the constructs of what we understand, if blockchain, digitization, tokenization, and crypto all move in the same direction together, where they’re going, then the chances are our understanding of what is a corporation, what is a share, what is equity, what is a bond, what is debt, I think changes.

Raoul Pal: And what I mean by that is right now… I mean, corporations were established, I don’t know, 500 or 600 years ago. So in legal terms, they had the same legal rights as an individual, which meant that you could sue a corporation, or a corporation could sue you. So that gave it a legal construct. Now, in a tokenized world, that’s not going to happen because you can’t sue a distributed ledger. So this is a problem. But it’s not a problem because… Also, let’s say you’re an oil company, why do you need to have shares in an oil company? Why not tokenize all the different revenue streams in an oil company, and have them as separate assets? So it doesn’t have to be a company, it can be a fractional asset pool. Once you start understanding the fractionalization and digital ownership of everything, it changes the entire financial system.

Raoul Pal: They’re already doing it with real estate, it’s just started tokenizing real estate. But sooner or later, you or I could own a share of the Four Seasons hotel in Sydney, which we couldn’t ordinarily afford but now we can because it can be fractionalized down by tokens. And we would have approval ownership of stuff. So there’s a whole host of things… Because you then start to be able to tokenize humans as well, in terms of I could tokenize your future as much as I could tokenize the future of your podcast. I could tokenize your future income stream or your functionality, there’s a lot of things that can be done. And what becomes interesting is think of a financial world where you could actually trade human skillsets. You could gather together a basket of engineering skillsets and short a basket of another thing that you don’t think is as valuable, hedge fund managers let’s say. You could short hedge fund managers by engineers, and trade that spread on future income streams. You can do that, because essentially we’re already doing it with sportspeople. So once you tokenize this, then you or I could invest in anything. It is really a ludicrous change that’s coming, so I don’t buy into the argument of one’s replacing the other, I think the whole thing is about to change.

Stephan Livera: Yeah, that’s quite a lot there. But I think one thing that jumps out to me is, and I accept that my view might be a little bit different, but my view is that some of these crypto tokenization projects, I think people might be taking a false hope in some of them and thinking, “I could get rich by buying this tokenized thing.” But really my question would be where is the value going to accrue? Would it accrue to the token holder or to the asset holder?

Raoul Pal: It depends what the token is, right? So, utility tokens and stuff like that, it’s a different world. The securitized token offering, where you’re actually buying a physical part, they’re all different. And again, we’ve gone through a bunch of scams with the tokenized offerings, what are you buying into?

Raoul Pal: I’m actually talking about the fractional ownership of assets. So I would call it a securitized token offering, which is just still in its nascent phase and maybe that’s not the final solution either. I don’t think the final set of everything is here. You know, there’s so many people working on so many projects, that we’ll see what develops over the next five to ten years. I think it’s going to be an enormous change.

Stephan Livera: Right, yeah. I think, ultimately, out of the cryptocurrencies, really in my view it’s only Bitcoin, and there may be other tokens but they’re not money, right? They’re trying to be something different. They’re trying to be the equity, or something in between.

Raoul Pal: Bitcoin isn’t money either. Bitcoin is… Whatever it is, it’s probably more of a store of value, because it trades… You know, that PlanB thing is so instructive, if you think about what he’s showing you. It’s showing you it trades as a rare asset, in which case by definition it’s more of a store of value and an investment asset, than it is money itself.

Raoul Pal: What I thought was ultra interesting was the Libra Project. Regardless of whether Libra happens or not, I’m not interested in that. What I’m interested in is the construct, and it wasn’t a cryptocurrency per se, but the construct of that basket of all the world’s currencies including dollars. Then you’ve got a super stable coin, which only rises and falls by global money supply and recalibrates all world trade, and it’s private sector. So I thought that was a very interesting thing. So, would that be money? Yeah, that probably has more moneyness than Bitcoin does, depending what platform you use to transact on it. We don’t know that either. So, money is an exchange of value and… it has to be accepted and it has to have a store of value, it has to be exchangeable. Well, those three things with cryptocurrencies can all be split out to different assets, and that’s what so clever about crypto, is nothing has to be one. And that’s really interesting. Because we’ve never had that before.

Stephan Livera: Okay, so my view there is… Let me just present a couple ideas. So, a couple of things there. I think we can’t so easily separate the store of value, medium of exchange, and so on. And the other way I would contend with that is really, we should view it like stages. Ultimately, I view it from: money is the most saleable good, and it doesn’t really make sense to have a store of value money, and a medium of exchange money. Really, it would just be one money that you’re transacting. And the way I would answer around why people don’t spend Bitcoin now, it’s because there’s a massive potential upside, so nobody wants to sell right now. And so my view is it’s more like stages of evolution, and some Bitcoin advocates, this is the view they will advocate. They’ll say something like it would start as a collectible, then into a store of value, so to speak, then a medium of exchange, then a unit of account.

Stephan Livera: What’s your view there?

Raoul Pal: I think that’s dead right. Problem is what grows up in parallel alongside it? Because that takes time, right? Because basically, the answer is you’ll know that when the last coin is mined. And that’s not super far away. But then what does the world look like and what is it’s value? Is it the 100 trillion dollars? What is it? We don’t know. But what I know is that far enough in the future, and there’s so much money at stake that a lot of smart people will try and solve it in different ways too.

Raoul Pal: And what I’ve been very interested in is the project in India with Aadhar and the digital payments system, which came out of not using Bitcoin or blockchain or crypto, and they solved payments. They have an unprecedented amount of payments going through on this new platform, which is super interesting. And how they’ve also put together India Stack with people’s KYC and also their medical records and a whole bunch of stuff, which is basically like a smart contract but solved in a different way. It’s very interesting.

Raoul Pal: So I think we need to be careful to just think blockchain is the answer to everything, and Bitcoin’s the answer to everything. The space itself is enormous, and some things are better and some things are worse. But even being better doesn’t necessarily make it the most successful. We’ll see what adoption is like, the network of that.

Stephan Livera: Yeah, look, I think for me personally, I am bit of a blockchain skeptic and a Bitcoin bull, right? So I think there are many examples where people use blockchain technology more for the hype than for the reality of what it will enable in a profitable way. In many cases it’s an inefficient data structure.

Stephan Livera: Look, I’m also interested, Raoul, to just discuss a little bit around PlanB’s work. What was it that got you interested in that? And do you view it, then, like this digital commodity? Is that how you’re viewing Bitcoin?

Raoul Pal: No. I’m not trying to view Bitcoin as anything but Bitcoin, because I’m trying not to anchor myself. It’s really hard because we’re all anchoring ourselves on something we know and understand. But I saw his work and I was blown away because he’d basically proved out what I’d written about in 2013 about there is a comparable value, and of which Bitcoin trades below where it should be in fair value terms versus where gold is.

Raoul Pal: But PlanB’s work was really in-depth and mathematically much more advanced than I could ever even conceive of. And what he did was he solved the valuation of gold in the same equation. Because by putting all assets in, and then it’s interesting because what for me makes an asset, and I’ve argued this about Bitcoin, I said it’s not trading like an asset yet, it’s because it has to have a relative valuation. So if I look at gold versus real estate, gold versus the stock market, oil versus real estate, oil versus the stock. They all have relative valuations, and they trade in wide bands. The only one that hasn’t traded in that band particularly well has been agriculture, that used to trade in a band but technological changes to crop yield has significantly changed the outcome for agriculture. So prices of crop produce has been falling. But all the others still trade in the same bands they’ve always traded at, and basically even arguably wheat trades roughly in a band with gold over a long enough time period. So that’s what I was looking at with assets, and he basically proved that out and showed out Bitcoin fits in perfectly in a model of assets, but it’s still trading at a discount to where it should be.

Raoul Pal: And then you look at the stock flow, and see where it’s going. And it gave gold a relative value versus silver, versus copper, versus diamonds, versus Bitcoin, and suddenly you’ve got a framework. Now, it doesn’t have to be perfect, and I don’t expect it to be perfect, but it gives you a very good hypothesis from which to work from, that it is a rare asset. That’s it. That’s all you need to know.

Raoul Pal: So, a rare asset. It has utility but doesn’t trade like a utility asset. Ethereum trades like a utility asset which is more like silver or copper. It trades more like gold, so people are perceiving it… As you said, they don’t want to sell it. Most people don’t sell gold if they can not, if they don’t have to. Sure, there are speculators in the space, but most people buy and hold for the same reason of the future value of it, or it’s hedged against that. So I thought that was what was super interesting about it, because it kind of made sense of what it was, and it made clear to me that it hasn’t even started its journey if it continues to do what it’s doing.

Raoul Pal: Now, obviously that could change. Maybe it loses its store of valueness. I don’t see how. I thought the forks might have been the one thing that could have done it, and it didn’t.

Stephan Livera: Yeah, let’s go into that. I’m curious, what was your thinking around the forks then, and what’s your thinking around the forks now? Do you believe that they’re just immaterial and they’re mostly irrelevant nowadays? What’s the thinking?

Raoul Pal: Yeah. I think so. And I think the space is big enough that even if a few forks work in some way, they don’t really take away from Bitcoin. I think the network effect has just basically backed Bitcoin, and Ethereum is going to be backed by use case. So I think that’s basically how it looks like it’ll play out for a while now. Who knows where the hell it is in the future. But that seems to be the case, people have just gone, “I don’t care about Bitcoin Cash, I don’t care about any of this stuff.” That may go up and down, that may do its own thing, but it’s not going to dilute the value of Bitcoin. I was really worried that it would be perceived to be an inflation, a dilution. And then you’ve got fiat coin, that’s what I was thinking. Because you can basically recreate the same blockchain with exactly the same attributes, so you’ve got Bitcoin 2. But what was interesting is the market chose not to back those. They had a go at them, then gave up. So that’s good. And that was an incredibly powerful statement for Bitcoin, because that could have been the death of the project.

Stephan Livera: Yeah, it’s interesting you say that. I think that was prior to the forks going on, there was a lot of speculation, people in Bitcoin were unsure whether these forks would succeed or not, and some people were more like, “I don’t want this fork to win, because if it does the whole project is over, so I don’t want to be involved anyway.” So when a futures market or some kind of market that they could sell the tokens in advance came, they were trying to sell that other token that they didn’t believe in, or that they didn’t think would have the right long-term plan. I suppose that’s where we’ve ended up with Bitcoin today, with it’s level of liquidity, it’s level of users, developers, merchants and so on.

Stephan Livera: I’m also interested to discuss some of the things I believe Bitcoin helps enable. Even if people today don’t necessarily want to spend it like a day-to-day currency, we can see that people can use it to spend where they have been censored, or where they have no access to PayPal or credit cards. And the relevance here as well that’s coming is in our modern world, we have things like the war on cash, we have negative interest rates. Do you see those as potential factors that may, again, push people towards Bitcoin?

Raoul Pal: I think only as a store of value. I think it’s useless in its current format of volatility as a payments method. And we accepted it as our business at Real Vision for a while, and it’s ridiculous. Something that goes up 20% in a day, you cannot run a business forecasting cash flows and revenues on it. So as a payments system, it’s utterly useless until it gets into the mature phase. Now, I don’t know when that mature phase is because if PlanB’s right, it’s a long way from here, right? In which case somebody’s going to develop something else in the interim. Doesn’t mean that Bitcoin won’t be used as that in due course, it’ll be another system. But right now, with this kind of volatility, it just does not make sense. If you’re forced to, of course, it’s great, you can use it. You know, if you’re trying to get money out of Venezuela, absolutely works fine. Nothing wrong with it, but it’s not consistent with a regular payments system yet.

Stephan Livera: Yeah, no, I think that probably mirrors the view of many Bitcoiners themselves. They view it like this is a stage process, and it’s contingent on upper layers happening and also a certain process of that monetary phase occurring.

Stephan Livera: Yeah, so look, I think it’s a really interesting space. I think the other question I was really keen to discuss with you is whether people… So let’s say we start seeing a recession occur. As you spelled out in your videos, you’ve got I think the three phases. Will people then start selling off Bitcoin, those Bitcoin investors, because they need to start paying off bills? Or will they keep it?

Raoul Pal: There’ll be some marginal selling. But you see, what people look at is while people sold gold last time around… So, gold has a different role, currently, and it will happen to Bitcoin in due course, but it’s not there yet. Gold is collateral, so when you see people selling gold, it’s because collateral is being liquidated against bad debts.

Raoul Pal: Bitcoin is not collateral. So yes, it may be your own personally collateral so, “Shit, I’m going to miss my house payments, I’m going to sell some of my Bitcoin,” sure. But it doesn’t have that institutional selling that gold can have in environments. So I don’t think it’ll get sold much, I think that there are a lot of bigger players who will look at…

Raoul Pal: As we start moving towards what I refer to as the end game, which I think will probably start with Japan having to monetize all of its debt and maybe try a debt jubilee in the next recession. Once people start seeing that probability coming, I think both gold and Bitcoin explode, because there are larger forces at hand that understand the risks to the system. I don’t think it’s the banking system per se that has the risk, but it’s the risk to fiat I think is a bigger issue in due course. I’m huge dollar bull so there’s a lot of phases before we get to that.

Raoul Pal: But somewhere within this, Bitcoin, like gold, has an embedded option in it, which is that if you do need security in an alternative financial system… One is a backward looking alternative financial system that’s worked very well in the past, which is gold. The other’s a forward looking financial system that’s yet untested, which is Bitcoin. What is the future value of either of those? In that environment, we don’t know. But it’s a lot higher.

Raoul Pal: That whole recession scenario is extremely positive over time. It will not be the pure safe haven, because it’s not correlated with that. It’s just not correlated with risk-on risk-off flows, because it’s correlated really with that stock flow model, plus human behavior, the boom-bust cycle of human behavior. But really the stock flows seem to be the prominent driver for the time being. But I think that it does work over time, as a safety.

Stephan Livera: Let’s talk a little bit about the demographics involved with what’s happening now. We’ve seen this big, big bull market in equities. Is it your view that as certain generations, say the boomer generation, are going to be going through more of a redemption cycle, how do you view that in terms of what’s going to happen for the equity market and the bond market over this next period?

Raoul Pal: The oldest generation and the largest generation on Earth, in the western world, is the baby boomers. As opposed to in the space around the Indian ocean and stuff, it’s actually the 20-year-olds right now. But the richest generation on Earth, all the assets are held by a bunch of 65-year-olds, whether it’s Australia, whether it’s England, whether it’s Germany, whether it’s the US. Some countries are older. Japan, they’re in their 70s, 75, 80. The Europeans are probably in their 70s and the US are probably in their 60s.

Raoul Pal: So those people have to divest themselves of assets, but most of them have held on the riskiest of assets because they didn’t have enough savings. They didn’t have the magic number they wanted to retire on, so they’ve taken risk. They’ve taken credit risk and they’ve taken equity risk in obscene amounts. The pension system’s gone out of the curve either further, and they’ve gone into hedge funds and private equity and venture capital, further and further and further out the risk curve to get these guys the money that they thought that they deserved. They’re not going to get that money. And once they realize it, once the next recession comes, the party stops because you’re 65 years old, you’re retired, you can’t buy the dip, you don’t have a salary to buy the dip with, so you’re going to panic to try to protect as much of those assets as you can, so you’ll be out. And you’ll be owning bonds, and you’ll just be out, and whatever pile you’re left with is what you’re left with. But a lot of people are going to lose a lot of money in this, so it’s a very worrying situation.

Raoul Pal: The flip side of this is the millennial generation. The millennial generation, if they were to buy equities at this point, they’re the most expensive they’ve ever been in all history, roughly… If they buy bonds, they get virtually no yields. If they buy real estate… It’s unaffordable, but even if they could, it’s almost at all time record highs. So what the hell does a millennial do to save for your future, when almost all assets have negative imputed returns for the next 20 years, 10 years? And the answer is well, you take the optionality of crypto currency and Bitcoin, because nothing else gives you that risk-reward profile where you can be wrong but you do it earlier on, you’ve still got plenty of time to accumulate wealth in other assets too. But if it pays off, it’ll pay off so spectacularly that everything will be right. It’s basically like being given a better chance than the baby boomers got when they could buy equities in 1982, and bonds in 1982. That was a gift. That’s why they’re the richest generation there’s ever been, they were given a gift. Equities are trading at a PE of 7 in the US, and bonds are at 15% in the US. They basically didn’t have to do anything but buy bonds, buy equities, go to the beach.

Raoul Pal: The same opportunities are potentially being given to the millennial generation with both Bitcoin and other aspects of this space. People don’t realize it yet, but it is probably the opportunity. So that’s how I think about this. I think there’s a tremendous amount of selling that has to come out of the baby boomers in assets that do not attract the millennial population yet, and to do so they’d have to be at a much cheaper price because nobody can afford real estate. I was talking to some of the guys who work for Real Vision, I was like how much is an average two bed, 800 square foot, 80 square meter apartment? So, you know, small two-bedder apartment, that’s like the benchmark trading asset of the world. And New York City, Manhattan, was like $1.3 million and outskirts of Queens, $600. And the average millennial, at 30 years old, is probably earning, working in New York City in a semi-professional business, 60 grand. So 10x to buy the shittiest place. There’s no way they can afford it. So it’s fascinating.

Stephan Livera: Yeah, it’s just been bid up to this crazy high level and that is many millennials’ angst. They feel that they have to borrow from their parents, or that they have to go into debt to their eyeballs. And the debt problem is not just on individuals, I think you’ve also rightly pointed out that there is a lot of corporate debt that we must consider as well. And what’s the impact for businesses when they’re operating at these crazy debt ratio levels?

Raoul Pal: Exactly right. It’s a huge problem. And there is going to have to be a huge transfer of wealth from the baby boomers to the millennials. You know, I’m not entirely sure that by the end of it we won’t revert back to two generations living together, or three generations. Because it does work, it works in Spain, it works in India, it works in the Middle East, it works in a load of places. We just, from the 1960s, stopped it in most of the West. But if you put people together again, it actually works. So maybe that’s the big learning lesson out of this thing. Individuals cannot generate enough wealth to create their own pension without having grandparents and kids within the mix.

Stephan Livera: Yeah, that’s also an interesting one around this question of can a family sustain it on a single income versus the double income family, which is also the-

Raoul Pal: But even now they’re priced for double income families, and they still can’t afford them because… So there’s two millennials, both earning 60 grand a year. So, 120 grand. 600 grand for the property, it’s still 5x their income. It’s just not doable. And you’re going to have to put down a 100 grand’s worth of deposit in that somehow. Where does that come from? You can’t magic that off the trees. You try living in New York City and saving money is almost impossible.

Stephan Livera: Yeah, so then the question then is what do they do about it? And typically they may just decide, “Well, I’m just going to rent, I’m not going to try to buy, and I’ll just try to make things work just from that, and not go any further.”

Raoul Pal: I think that’s right. Imagine if you could tokenize some of that real estate asset, so you may not live in it but you may be able to own it, so it trades as a different asset. Now that changes probably the fair value of all assets. It’s a kind of weird world.

Raoul Pal: The other thing that happens is you do get lifestyle arbitrage and I think that will happen over time. For example, I moved from London to Spain in the early 2000s because for my three bedroom apartment in London I bought a house on ten acres on a side of a mountain in a beach town in Spain. The arbitrage between the quality of life, the weather, the cost of living, everything, was so enormous, that why would I stay in London? Particularly with this digital world. So now there are a number of places that are very attractive and much cheaper to live. Particularly as the developing world develops so fast these days. Things are changing.

Raoul Pal: You see it in this hemisphere. The Americans moving to Mexico, Panama, Costa Rica, places like that you’re seeing a huge shift of peoples who… In each of our areas, in your timezone the amount of people moving to whether it’s Vietnam or Thailand particularly, it’s had a huge arbitrage of people moving there saying, “I can do my job from Thailand and it costs me 50 grand to buy a house or an apartment, so why would I not do that?”

Stephan Livera: Yeah, that’s definitely a factor, the arbitrage factor. I’m also curious, you mentioned around the tokenization. One area that I’m unsure, and I’m curious to know your thoughts, can’t people already buy, say, RIETs and invest in real estate in that way? I guess my question then is in what way is it meaningful to say that we’ve got real estate tokenization when people can already buy a fraction of real estate?

Raoul Pal: Well, because when you buy a fraction of real estate, what you’re actually doing is buying a fraction of an asset management firm and all the flows and costs and everything else. That’s the difference. Is you’re actually buying a direct ownership of an asset, so you have no middle man. It’s the disintermediation of the middle man. So what you end up is a much more efficient structure of which to own things, and it’s also more tradeable in its own fractional format. There’s a number of different ways you can do that. So, yes, it is somewhat similar to a RIET in certain respects, but don’t forget that with a token, you can tokenize different parts of the capital structure of the building. So it could be that you take part of the rental stream, or you could take the value stream, or you could take the renovation stream of income. There’s so many things you could do, that you can’t actually do right now.

Stephan Livera: Right. I suppose you’re saying it allows for finer division of the components or potentially slight gains from cutting out certain middle men, where some kind of efficiency gain is possible.

Raoul Pal: Yes. If you think of an apartment block in Sydney and some of the apartments need doing up, some don’t, some have rental income, some… You can actually package up all different parts of this and tokenize it out. So you can say well, here’s our rental pool, there’s five apartments here that are going to rent so you can take your token on the rent, so you’ve got building rent token. And then you’ve got these apartments haven’t been done up, so they’re still 1970s apartments and they need renovating, so there’s a kind of renovation tokens, of which you get the rights to the future value after renovation minus the costs. Then you’ve got others that you may be already renovating, because a lot of people don’t want to go through the hassle of renovation, but you could buy a token on a renovated property. You could buy a token on a perfect for sale showroom property, which you may make less margins. So you’re basically going up and down the risk structure of a building. You can’t do that right now. But with tokens you can.

Stephan Livera: Right, I see.

Stephan Livera: I suppose I just see it more like, for me, Bitcoin is the biggest opportunity and I can’t see a better asymmetric bet. But I appreciate other people have different choices and different preferences.

Raoul Pal: Yeah, again, I’m not saying that Bitcoin does not offer that, I see that 100%. What I’m saying is it’s even bigger than we think, because there’s a whole world moving to digitization and once we go to that, there’s a whole world of opportunities. So if you’re a younger person, your opportunity set is going to be very different to what you think the opportunity set is today, which is right now you’ve got equities and bonds and blah blah blah, and you’re going to have not just Bitcoin but a whole different financial economy for you to get involved in.

Stephan Livera: Right, I see.

Stephan Livera: Well, I think we’re just about getting to the end of our time. Raoul, thank you, it’s been a fascinating discussion. I think my listeners will get some great perspective out of it. But before we let you go, just tell my listeners where can they follow you and where can they find Real Vision?

Raoul Pal: Sure, so you can follow me on Twitter. I’m very active, I’m pretty good at getting back to people and chatting to people. And that’s @raoulgmi. So GMI’s Global Macro Investor, my writing business. So @raoulgmi, so you can find me on Twitter.

Raoul Pal: And to check out Real Vision, just go to realvision.com/free and that’s the free channel, so you can just go and knock yourselves out with the content. We’ve featured crypto content from day one, so we have a lot of content and we have some of the most famous people in the space, from the founders of Ethereum to big investors like Dan Morehead, to use cases like Wences Casares. You name it, they’ve all been on Real Vision, so there’s a ton of great, great content and if you want to understand the juxtaposition between the macroeconomic world and the future of investing and how that all fits into this world as well, that’s all there too.

Stephan Livera: Fantastic.

Stephan Livera: So, look, I’ll put all the links in the show notes and Raoul, thank you again for joining me today.

Raoul Pal: No, thanks so much. Really appreciate, really enjoyed it.

Stephan Livera: I hope you enjoyed the discussion with Raoul Pal. To my mind, with so many macro fund managers being invested in Bitcoin personally, it seems that it’s only a matter of time until they’re investing via their funds also.

Stephan Livera: Also, I just wanted to take a moment and thank you all. As I record and release this episode, I’ve been podcasting for one year now, believe it or not. My first episode with Saifedean Ammous was in late July 2018, and here we are now, 93 episodes later, in July 2019. I want to express my sincere gratitude to all the people who make this possible, podcast sponsors, Patreon supporters, guests who give their time to join me on the show, and I’ve got a very fanatical, strong listener base who leave me five star reviews and share my episodes all over social media and in their chat groups, and tell their family and friends about my show. It’s truly a great pleasure to meet you guys in person at meet-ups and conferences, or to see all the DMs and emails I get from listeners who really enjoy the show. I put in a lot of work behind the scenes to curate and research the show guests and material to make it as high signal as I possibly can. And for the support and gratitude I receive from my listeners, it’s all worth it. I couldn’t do it without your support, so a big thanks to all of you.

Stephan Livera: For new listeners, you can subscribe to this show using Apple, Android or RSS links on my homepage, stephanlivera.com. And you can also find the show notes there.

Stephan Livera: Thanks guys, and I’ll speak to you soon.

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